TMI Blog2004 (4) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the previous year relevant to the assessment year under appeal. The business carried on by the Firm ceased w.e.f. 31-8-1997. Therefore, the assessee filed two returns for the impugned assessment year under two types of status. The assessee filed the first return for the assessment year 1998-99 with a broken previous years from 1-4-1997 to 31-8-1997, in the status of a Firm. The second return was filed for the remaining broken period of the previous years from 1-9-1997 to 31-3-1998, in the status of AOP. 3. The crucial issue to be considered in these appeals is whether there was distribution of capital assets owned by the firm at the time of discontinuance of its business on the ground that the firm was dissolved at the time when its business was stopped. If distribution of capital assets had taken place at the time of dissolution of the Firm, the Firm is accountable for the levy of capital gains tax. Obviously, it is the argument of the Revenue that the Firm has been dissolved and there was distribution of capital assets among the erstwhile partners and, therefore, the Firm is assessable to capital gains tax. On the other hand it is the argument of the assessee that the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the name of the Firm was initially processed under section 143(1) on 31-12-1999 and thereafter, the assessment was reopened by issuing notice under section 148. The assessment was reopened for the purpose of bringing the capital gains deemed to have arisen in the hands of the dissolved Firm at the time of distribution of capital assets among the erstwhile partners. It was the contention of the assessee that the business carried on by the firm alone was stopped and the Firm as such was not dissolved. The assessee contended that the partners have not executed any dissolution deed and the dissolution notice was not given to any of the parties including the Registrar of the Firms. If circumstances permitted, the Firm could have resumed its business again in any of the fields of its choice and, therefore, distribution of capital assets cannot be contemplated in this case. The assessee therefore, contended that the provisions of section 45(4) would not apply and no case of dissolution of firm could be inferred. The Assessing Officer on the other hand, held that the only business carried on by the Firm was running of the departmental store and once that business was discontinued, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961." 8. We have heard Shri Firoze B. Andhyarujina, learned counsel appearing for the assessee. He submitted that the lower authorities have erred in equating the discontinuance of business to the dissolution of the Firm itself. The learned counsel submitted that the two concepts viz. discontinuance of business and dissolution of a Firm are entirely different. The learned counsel pointed out that the discontinuance of business carried on by a Firm does not ipso facto result into the dissolution of a Firm. The dissolution of a Firm is an independent process to be carried out by the consensus of the partners of a Firm and as per the terms of the partnership deed. In the present case the only business carried on by the Firm was running of departmental store. The said business was discontinued by the Firm. Thereafter, the Firm had to utilize the property in a profitable manner. Hence the property was let out to IDBI Bank Ltd. on the basis of a lease agreement. The rental income is infact paid to the firm itself even though by virtue of law relating to the assessment of property income, the pro rata shares of the partners in the rental income is construed as the income of co- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for any profit and gain on alleged transfer of assets. 11. The learned counsel relied on the following decisions in support of various arguments advanced by him: ( i ) CIT v. Sarabhai Pvt. Ltd. [2003] 263 ITR 197 (Guj.). ( ii ) CIT v. Surat Textile Market Co-operative Shops Whorehouse Society Ltd. [2003] 264 ITR 289 (Guj.). ( iii ) Asstt. CIT v. Saptarshi Services Ltd. [2004] 265 ITR 379 (Guj.). ( iv ) CIT v. Mangalore Ganesh Beedi Works [2004] 265 ITR 658 3 (Kar.) 12. Ms. Asha Agarwal, the learned Commissioner appearing for the Revenue contended that the entire factual matrix leading to the present issue has been discussed thread bare both by the Assessing Officer and the learned CIT(A) in their respective orders. Those facts, undisputed though are proved beyond any doubt that the discontinuance of business has virtually resulted into the dissolution of the Firm itself. The movable properties of the Firm have already been divided among the partners by passing appropriate entries in their capital accounts. The only remaining property was the immovable property in the nature of a shop at Tirupati Apartments, Bhulabhai Desai Road, Mumbai. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner also relied on the decision in the case of CIT v. A.N. Naik Associates (265 ITR 346). 17. We have heard both the sides in detail and examined the rival contentions in the light of the details placed before us alongwith paper-books and case laws. 18. There are no disputes on the facts leading to the issue. The business of the assessee firm was stopped w.e.f. 31-8-1997. The only business carried on by the Firm was running of the departmental store. Once that business was stopped there was no other line of business to be carried on by the Firm. Therefore, it is to be seen that the firm has become functionally defunct. 19. The next concern is whether the discontinuation of business which has made the partnership firm functionally defunct amounted to dissolution of the Firm or not. For this purpose it is necessary to examine the events that followed the discontinuance of the business. As soon as the business discontinued the partners have entered into a Memorandum of Understanding. As per the said Memorandum of Understanding the share of every partner has been specified and the specified right has been conferred on every partner. Thereafter, the partners again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the sustenance of the partnership firm has come to an end. They own the property in their status as co-owners. The co-owners are not bound by each other. There is no Principal-Agent relationship among the co-owners in the present case after the Memorandum has been signed and the property has been let out as a joint ownership property. As there is no such Jural Relationship among the partners, it is not possible to hold that the Firm still continued to exist even after the discontinuance of the business. 24. We have also considered the argument of the assessee that the property was not distributed among the partners in specie . We are not able to accept the contention of the assessee in this regard. The property owned by the partners in this case is a single shop, i.e. shop No. 2 at Tirupati Apartments, Bhulabhai Desai Road, Mumbai. The only mode of distribution of the property is to declare the rights of the partners in the respective shares. The property which is in the nature of a single shop, by its nature itself, cannot be divided or distributed among the partners in any other manner. The only manner in which the said property could be distributed among the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution of assets among the partners. Therefore, the levy of capital gains tax is justified. The ground raised by the assessee in this behalf therefore fails. 28. At this point we are inclined to consider the alternative ground raised by the assessee in this appeal. The alternative ground is that the capital gains arising out of the distribution of assets need to be treated as long term capital gains. It is the case of the learned counsel appearing for the assessee that the assessee has not claimed any depreciation on the property of the shop. As no depreciation has been claimed so far and the property has been held for years, the gains if any arising out of the transfer of the said property needs to be treated as long term capital gains. 29. We accept the above alternative contention of the assessee. We direct the Assessing Officer to verify the position whether the assessee had claimed depreciation on the property or not. If no depreciation has been allowed so far, it is necessary for the Assessing Officer to treat the gains as Long Term Capital Gains. Once the gains is treated as long term capital gains, the assessee is entitled for the benefit of indexation and spec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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